In the modern world, an act of investment involves a great amount of risk. This is also applicable while investing in real estate. It means locking up funds for long time in the hope of getting profits as a reward over the expected economic life of the capital asset.

When a builder installs a new machine; he is undertaking an act of investment, expecting to reap profits in the future from the sale of the output of the machine. But the future by its very nature is uncertain. It is quite possible that when the machine is ready for production, the demand for its product may no longer be there, so that instead of profits there may be losses.

The great uncertainty about the future gives rise to the extreme instability and fluctuations in the rate of investment in modern capitalist economies. To compensate them for bearing these risks, the investors want a high enough rate of profit so as to induce them to take such risks. If this rate of profit is not adequate, the inducement to invest will be very weak.

The investors in real estate try to reduce the unpredictability of the future by trying to base their decisions in the light of past and present trends. Marginal efficiency of investment is the highest expected rate of profit, which is likely to be had by a marginal increase in the rate of investment. Since it refers to the expected rate, rather than the current rate of profit, marginal efficiency of investment is liable to a great deal of fluctuations in the short run. It is the prospective yield, which gives the marginal efficiency of capital its most important characteristic, i.e., instability. The marginal efficiency of a capital asset can be calculated by relating the prospective yield of the asset to its supply price.

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